The NightShares 500 1x/1.5x ETF (NSPL) can be used to efficiently capture the night effect, enhancing returns for investors.
The night session, defined as buying at close and selling at the next open, has historically performed very differently than the daytime session. This powerful, persistent pattern observed in markets is referred to as the night effect.
The overnight trading session tends to contribute most of the returns, while the day session contributes most of the volatility. By leveraging the overnight exposure, investors can enhance their risk-adjusted returns, demonstrated by a more favorable Sharpe ratio.
NSPL seeks to provide returns that correspond to 1x the performance of a portfolio of 500 large-cap U.S. companies (comparable to the S&P 500) during the day and 1.5x the portfolio performance at night. By tilting toward the night, investors can capture the night effect without forgoing any gains during the day.
Recently, the night session has rallied on rosy earnings reports and upbeat macroeconomic updates. Many key macro and earnings updates are released during the post-close (between the closing bell and midnight) or the pre-open (between midnight and the opening bell), greatly influencing returns during the overnight trading session.
“Many market developments occur during after hours trading,” Todd Rosenbluth, head of research at VettaFi, said. “Combining the night hours with traditional day time ones will allow participation of trading when a wave of company earnings come out.”
Enhance Risk-Adjusted Returns with NSPL
Comparing the Sharpe ratios for the different trading session highlights the value of capturing the night effect in portfolios.
The SPDR S&P 500 ETF Trust’s (SPY) Sharpe ratio is 0.49. Meanwhile, the night session Sharpe ratio is 0.59, while the day session Sharpe ratio is just 0.11. Conversely, the 1x/1.5x exposure’s Sharpe ratio is 0.55, the most appealing of the group when considering that it offers the greatest returns.
According to NightShares, the percentage of sessions when night was up in the 24-hour cycle has consistently been at 56%. This figure is consistent across five-, 10-, and 20-year periods as of December 31, 2022.
Notably, to capture the night effect, NSPL is not actively trading during the overnight session. Rather, it acts as a buy-and-hold during the overnight session, which tends to see a stable upward drift.
For more news, information, and analysis, visit the Night Effect Channel.